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Market Power, Not Quality Linked to Higher Healthcare Costs

Healthcare costs in New York were up to 2.7 times higher at some hospitals because of increased market power, a recent report found.

December 28, 2016 - Higher healthcare costs at New York hospitals are linked to increased market power and not higher quality of care, the New York State Health Foundation recently reported.

More expensive hospitals tended to have increased market leverage, such as greater market share, large healthcare system participation, rural status, and less competition. But researchers found that increased market leverage hindered competition, product innovation, healthcare transparency, and hospital cost containment methods that could decrease price variation and increases.

“This landmark report helps explain what is happening at the negotiating table between hospitals and insurance plans, and how it results in such wide price variation,” David Sandman, PhD, President and CEO of New York State Health Foundation, said in a press release.

“Transparency is the future,” he added. “Policymakers and other stakeholders can use these findings to address market dysfunctions that may be compromising consumers’ health and wallets and help make health care more affordable for New Yorkers.”

The report’s market power and healthcare costs connection, however, can be felt by more than just New York hospitals. MedPAC reported in November that hospital mergers, which increase a hospital’s market power, disincentivize hospitals across the country from lowering their healthcare costs.

With more negotiating power with payers, hospitals with more market power had higher claims reimbursement rates and less incentive to decrease their prices and costs. As a result, MedPAC reported that market power led to significant price variations among hospitals for the same services.

The New York State Health Foundation study of 107 New York hospitals also found wide price gaps because of market power. Healthcare costs at the highest-priced hospitals were 1.5 to 2.7 times more expensive than at the lowest-priced hospitals in the state.

Similarly, even hospitals in the same peer group, including size, services, and teaching designation, faced significant price variation. Some hospitals had healthcare costs 3 to 4 times higher than their peers.

However, healthcare cost variations were not consistently related to quality of care differences. Based on performance at 12 hospitals on 12 quality measures, researchers revealed no association between hospital performance and price 57 percent of the time.

“In other words, no insurers or regional groups of insurers consistently rewarded high-quality hospitals with higher levels of reimbursement than their lower-performing peers, nor did they penalize lower-quality hospitals with lower levels of reimbursement,” stated the report.

Instead, researchers found that market leverage was more closely associated with higher healthcare costs at New York hospitals. Hospitals with higher prices tended to have greater market share, be part of a larger healthcare system, have rural status, and face less competition.

For example, healthcare system participation was connected to higher healthcare costs among Buffalo hospitals. In Buffalo, two major healthcare systems accounted for 70 percent of the market. Hospitals in the systems consistently had higher prices than those in the group of independent hospitals and specialty hospitals in the region.

Similarly, hospitals in Albany had higher healthcare costs because of their rural status. With only one academic medical center, one hospital system, three community hospitals, and several rural hospitals, rural hospitals could charge higher prices since patients had fewer options for treatment.

Academic medical centers in some regions also charged the highest prices because they were the only academic medical center available.

With more market leverage, hospitals gained more bargaining power with private payers, the report stated. But claims reimbursement contracting practices among private payers may have exacerbated healthcare costs variations.

Anti-steering and tiered network language also prevents payers from giving healthcare costs and quality information to beneficiaries. While anti-steering stops payers from directing patients to lower-cost providers, tiered network language oftentimes prohibits tiers or requires a hospital to be placed in the most favorable tier.

Since hospitals with increased market leverage have more negotiating power, payers may not be able to eliminate the language from their contracts. Some payers may not want to risk losing hospitals with more market power from their networks.

Termination clauses also provide hospitals with more leverage because they may be able to back out of a payer contract at any time. However, the report noted that payers may also have the same power.

But some hospitals have argued that outside vendor use prevents them from integrating and coordinating care. As a result, hospitals with more bargaining power have been able to incorporate outside vendor terms that benefit them, such as requiring the vendor network to include the hospital or mandating that hospital prices supersede vendor prices.

To better control healthcare costs in New York, the health foundation recommended that the state simplify claims reimbursement strategies, prohibit some contractual language from hospital and payer contracts, and continue market dysfunctions monitoring.

Healthcare stakeholders would better understand hospital prices if claims reimbursement methodologies were simplified, the foundation stated. New York should consider requiring all payers to use the same Diagnosis Related Group grouper for inpatient reimbursement and/or the same outpatient hospital fee schedule.

“This would still allow the insurer and hospital to negotiate different base rates or multipliers, but would provide a level of standardization to hospital reimbursement that would make rates more easily comparable,” stated the report.

Standardized claims reimbursement strategies across payers would also cut down on hospital administrative costs associated with contract negotiations and claims submissions to multiple payers with different requirements.

New York should also consider barring some contractual language from claims reimbursement contracts, such as confidentiality, anti-steering, and tiered network prohibition clauses, to lower healthcare costs over the long-term, advised the organization.

“Barring such language will increase transparency but could also increase overall costs in the short term as lower-priced providers may demand greater reimbursement,” explained the report. “In addition, the State could adopt standards that prescribe how tiered networks should be defined, so that all must meet the same standard.”

The foundation also recommended that New York analyze and publish provider price data on an annual basis, like practices in Massachusetts. In Massachusetts, the Health Policy Commission gathers relative healthcare costs information and analyzes how provider changes, such as hospital mergers, affect prices.

New York should employ similar analysis by using its all-payer database, which is scheduled to launch in 2017.

Using the three strategies, the New York State Health Foundation intends to help policymakers decrease healthcare costs, making healthcare more affordable for residents.

“The drivers identified may threaten the ability of the health care market to maintain healthy industry competition, thus leading to unaffordable health care for New Yorkers,” concluded the foundation. “This report is intended to fuel an ongoing dialogue among key industry stakeholders and policymakers to stimulate increased policy efforts and inform future cost containment policies.”